US jobs give local stocks an early lead

“How on earth can anyone seriously be expecting that the Reserve Bank will be starting to lift the cash rate from September next year as markets have been pricing?,” says Saul Eslake.
Photo: Arsineh Houspian

Still, the jobs report was not enough to bring expectations forward for when the Federal Reserve will taper the pace of quantitative easing (QE) and economists still think the central bank will keep bond purchases at $US85 billion a month until March 2014.

Futures prices indicate a 1 per cent rise for the S&P/ASX 200 Index after it closed at 5400.7 points on Friday. The Dow Jones Industrial Average added 1.1 per cent and the S&P 500 added 1.6 per cent on Friday.

The Australian dollar is fetching US93.84¢ after trading as high as US94.82¢ on Friday night.

Markets may get a better sense of whether that will be enough to mount the case for tapering early in 2014 when the confirmation hearing for Fed chairman nominee Janet Yellen takes place in Washington on Thursday.

Any references to a higher hurdle for tapering under her leadership will be a boost for the Australian dollar because it suggests an enduring period of QE.

Kapstream Capital co-founder Kumar Palghat said the jobs data for last month would not be compelling enough to motivate the Fed to move before the first quarter of 2014.

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“I don’t think the Fed’s going to taper any time soon," he said, because the full impact of the 16-day shutdown of the public service was still unclear and the central bank would want to see even higher levels of jobs creation. “To my mind, one number does not make a trend."

Although he agrees March could make sense for a reduction in stimulus, he is not overly attached to that date. “Remember, the market was very attached to August and September," Mr Palghat recalled of consensus only three months ago when economists wrongly tipped a 2013 taper.

Local economic data including consumer sentiment and business confidence due this week will test whether the post-election bounce in sentiment shapes up as a sustainable trend.

Last week, the Reserve Bank of Australia downgraded its growth outlook on evidence that the drop-off in investment from the mining sector will be sharper than expected. It sees economic growth at 2.5 per cent in 2014 and between 2 per cent and 3 per cent in 2014-15.

Saul Eslake, Bank of America-Merrill Lynch’s chief economist in Australia, said that if anything, the revision supported further easing than the tightening that most economists think will begin next year. “How on earth can anyone seriously be expecting that the Reserve Bank will be starting to lift the cash rate from September next year as markets have been pricing?," he said.

“In my view the statement explicitly leaves the door open, if only very slightly, to a further reduction in rates next year," he said. Mr Eslake forecasts another rate cut from the RBA.

He does not think the uptick in sentiment demonstrated by some parts of the economy following the change in government has translated to firm investment intentions and hiring.

“For the Westpac and Melbourne Institute survey which you can cut by voting intention, all of the increase in consumer confidence since August was among coalition voters. In fact there was a deterioration in consumer sentiment among Labor voters," he observed.

“I thought [Treasurer] Joe Hockey was very brave to interpret the better than expected consumer spending numbers from September as a vindication of the change of government," he added, citing the sometimes volatile nature of this data and its timing.